The current economic situation in China and its impact on the Czech Republic

Summary

Nowadays, many companies try to enter to the international sector and to extend here their activity. Their international cooperation is an integral part of the action; it is necessary to know the cultural differences. Therefore it is important to understand the social development including the Social Progress Index and the secondary analysis of an economic situation in China; and its subsequent impact on the economy not only in the Czech Republic based on evaluation of Czech-Chinese business relations. China was in the last five years the male rotor of the world economic growth and became a significant importer of commodities. Last year, the Chinese economic growth rate slowed down, which could have negative consequences on other economies. This is also the possible reason for some Czech companies leaving the Chinese market; they transfer their production parts back to Europe or India. A presumption of high living standard, which all countries of the world and their inhabitants want to achieve, is according to the current paradigm of economic science the economic growth. The economy does not take pace in a vertical line, but at the horizontal level as the meaning of sharing in the net among the individuals. And the cooperation does not take place in the horizontal line but in the vertical line, which essentially changes the way of peoples working.

Abbreviations

CSO , Czech Statistical Office ; CZK , Czech Crown, currency ; e.g. , for example ; et al. , and others ; EU , European Union ; GDP , gross domestic product ; i.e. , it means ; IMF , International Monetary Fund ; MFA , Ministry of Foreign Affairs of the Czech Republic ; OECD , Organization for Economic Cooperation and Development ; USA , United States of America

Keywords

China ; The Czech Republic ; Social Progress Index ; Economy growth ; Foreign trade ; Social development

Introduction

Economic growth has lifted hundreds of millions out of poverty and improved the lives of many more over the last half century. Yet it is increasingly evident that a model of development based on economic progress alone is incomplete. Economic growth alone is not enough. A society that fails to address basic human needs, equip citizens to improve their quality of life, protect the environment, and provide opportunity for many of its citizens is not succeeding. We must widen our understanding of the success of societies beyond economic outcomes. Inclusive growth requires achieving both economic and social progress (Porter et al., 2015 ).

Nowadays, more and more companies try to enter to the international sector and to extend here their activity. Whether it is the establishment of the new division abroad or it is the joining of two companies, it is still necessary to know not only the company, but also the national culture; both of them can be closely linked. The culture, national or of the company, affects and forms not only the individual inside the company, but also outside and in some cases has far-reaching consequences.

The aim of this paper is to describe the importance of the society development including the Social Progress Index and the secondary analysis of an economic situation in China; and its subsequent impact on the economy not only in the Czech Republic based on an evaluation of Czech-Chinese business relations. The paper is based on the hypothesis, which argues that the economic growth, important for the current economic science and for the economic policy of states, cannot represent essential and key parameter of economic and social development of a human society, to which should be subjected all the civilization activity. This is especially due to the fact that in the current world economy shows the action of cardinal restrictions, which limits it.

Material and methods

Presently, the international cooperation is an integral part of the action of many companies; therefore it is necessary to know the cultural differences, also in the case of acting with an inland company, which can have an organizational culture – in some cases – much more different. The ability of understanding other culture is now the target of many companies, because of the achievement of the competitive advantage.

An author of a modern global science definition, Sir Edward Burnett Tylor, defined the culture concept as follows: “Culture, or civilization, taken in its broad, ethnographic sense, is that complex whole which includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by man as a member of society. ” ( Lukasova, 2010 , p. 12).

The culture is everything that is created in a group, what continues and what is transformed, it can be the language, religion, morals, law, custom, values, education, acting, over all everything that makes it possible for a group to work. These aspects are for each group specific and are transmitted through learning.

The culture is adherent to the economic growth and also to the social progress of particular countries. The source of the longtime economic growth, i.e. the changes of aggregate supply (a potential product), is partly an increasing of input amount (then a capital and labour), i.e. an accumulation of a production factor, and partly a more effective usage of the existing inputs (then a growth of a total factor production), for example thanks to a technological progress (innovations), higher intelligence of manpower (quality of human capital). A more effective usage of existing machinery affects a broad-spectrum of factors.

The institutional quality and the political stability effect advantageously the investment decision at projects with a long-term return. The openness of a country to the external economic relations stimulates the competitive pressures on domestic producers and it is the source of an international transfer of the technicalities. The volume of innovations (the technological change rate) effects the investment into the research and science, and the ability of the usage of their outputs in practice. To the more effective usage of productive instruments is contributing the level of manpower qualifications, which is affected by the spending for an education (Kaderabkova and Zdarek, 2006 ).

The long-run growth of the real GDP per capita is an essential prerequisite for increasing the standard of living, which is approached by the economic level and its change in time. If a less developed country grows in the long term faster compared to a more advanced country, there is a catching-up, i.e. their economic levels are convergent. The economic growth rates in these countries are often dramatically different and also different is the growth performance in time. The causes of these dissimilarities are in the historical comparison partly nationally specific, partly common for country groups (on the similar development level), as can be demonstrated on the development after the World War Two in the Western Europe, Japan and USA; as a long time leading economy in term of an income level per capita and technological development (Kaderabkova and Zdarek, 2006 ).

The Social Progress Index aims to meet this pressing need by creating a robust and holistic measurement framework for national social and environmental performance that can be used by leaders in government, business, and civil society to benchmark success and accelerate progress. The Social Progress Index is the first comprehensive framework for measuring social progress that is independent of GDP, and complementary to it. The Social Progress Index offers a concrete way to understand and then prioritize an actionable agenda advancing both social and economic performance (Porter et al., 2015 ).

Porter et al. (2015) defines social progress in a comprehensive and inclusive way. Social progress is the capacity of a society to meet the basic human needs of its citizens, establish the building blocks that allow citizens and communities to enhance and sustain the quality of their lives, and create the conditions for all individuals to reach their full potential. This definition is the basis of the three dimensions of social progress: Basic Human Needs, Foundations of Wellbeing, and Opportunity.

It is obvious that the interconnection of cultural, social, ecological and economic aspects affect not only the economies of individual companies and nations, but also the global economic situation.

Generally, there is applied especially the normative approach in the paper, which results from the detailed object analysis and uses the recommended theoretical processes, exactly the analysis and synthesis of the past, the present and the prediction of the future. There are applied the fundamental, notorious methods, accordant with this process of mind study. These are especially the methods using the logic principles and logic thinking using the well-known “pair methods” trio of an abstraction and concretization, an analysis and synthesis and an induction and deduction.

Results

The Social Progress Index findings reveal that countries achieve widely divergent levels of social progress at similar levels of GDP per capita. A rich country may do well on absolute social progress; a poor country may achieve only modest levels of social progress. To determine a countrys relative social progress performance is designated a relevant peer group, the 15 other countries most similar in GDP per capita, and calculated median social progress scores for the peer group (Porter et al., 2015 ).

The Czech Republic based on the evaluation of the social progress index (Porter et al., 2015 ) was in 2014 on 22nd place with score 80.59 and GDP per capita PPP $27.959 and it means that the Czech Republic Social progress index is on level high social progress and on the other hand the same year was China with 92 rank on LOWER MIDDLE SOCIAL PROGRESS level with the score 59.07 and GDP per capita PPP $11.525. Even this situation describe that the Czech population is in better situation, especially in social progress and economical, when we see every person separately. For example in the table there are chosen 4 countries we can see the differences between European and Asian countries in 2014 (Table 1 ).

Table 1. Social progress index (Porter et al., 2015 ).

Country	Rank social progress index	Social progress index	Rank basic human needs	Basic human needs	Rank foundation of well being	Foundation of well being	Rank opportunity	Opportunity
Czech Republic	22	80.59	11	94.23	15	79.04	27	68.49
China	92	59.07	71	73.74	88	65.4	110	38.08
Japan	15	83.15	5	95.01	20	78.78	19	75.66
Germany	14	84.04	12	94.12	10	81.5	16	76.49

The Social Progress Index, by separating the measurement of social performance from that of economic performance, allows a rigorous empirical understanding of the relationship between economic development and social progress. It can also inform our understanding of how social progress can drive economic growth.

Last year, the Chinese economic growth rate slowed down to 7.4% from 7.7% in 2013. The economic growth was the slowest since 1990 and for the first time in 15 years fell behind the government target, according to which it should reach 7.5%. China was in the last five years the male rotor of the world economic growth and became a significant importer of commodities. A weaker growth in China could have negative consequences on other economies (OECD, 2015a , OECD, 2015b  and Reuters, 2015 ).

“The range of the Czech foreign trade with China was 2005 to 2012 in more than nine-tenths determined by import, which covered at some products a great deal of import needs of the Czech Republic. In that period increased the import from China from 94.1 milliards CZK to 305, 2 milliards CZK,” reviewed the trading progress with China Mr. Karel Kral, the director of the foreign trade statistics department of the Czech Statistical Office. The export increased in 2012 compared to 2005 only by 25.5 milliards CZK. Dramatically higher values of the import compared to values of the export affected the growth of the foreign trade deficit with China (in 2012 compared to 2005 by 148.6 milliards CZK), which negatively affected on the progress of the general trade balance of the Czech Republic (CSO, 2015 , Jianxin, 2015 , IMF, 2015a  and IMF, 2015b ).

China affects the Czech import very dramatically. In 2012 was China with share of 11.1% our second most important trading partner. The first was Germany with share of 25.5% in imports of all products into the Czech Republic. In the graph, there is the foreign trade of the Czech Republic with China (Businessinfo, 2015) ( Graph 1 ).

Graph 1.

Foreign trade of Czech Republic with China (CSO, 2015  and MFACZ, 2015 ).

Compared to the task of foreign trade of the Czech Republic with China is in general foreign trade relations of the Czech Republic (especially in import) is the position of Chinas foreign trade insignificant. The Czech Republic shared in 2011 in the total turnover of Chinas foreign trade by 0.3% (from that in Chinas export 0.4% and in Chinas import 0.1%) (CSO, 2015 ).

The investment activity in China supported especially the high rate of return thanks to limited wage claims and the growth of export. The wage restraint stimulated the growth in profit and the profits retroactively brought the necessary resources for the investment financing. The sufficiency of investment resources from the domestic source was significant because the approach to the foreign financial source was still limited by the obstacles of the international capital movement. The wage seriousness brought profits also for the workers; the high investment stimulated the growth of the output, production and real income.

The foreign analysts (World Bank, 2015 , IMF, 2015a , IMF, 2015b , IMF, 2015a  and IMF, 2015b ) predicted at the beginning of the year the growth in GDP of China roughly at the level of 8–8.5%. The data for the first half-year did not confirm these prognoses, because the Chinese economy slowed down more than the foreign institutions expected. Up to this year China had the largest economy on the whole planet, but it is not the only area where China overcame USA. China assumed the role of the leader in the worldwide trade, in the production and energy consumption; and it logically produces more products than USA. The global economic effort goes dramatically to the East, which will have gigantic impacts on the competitiveness of EU economy, USA economy and others. In terms of GDP USA is still number one, at least for this time. According to IMF China is currently number one in terms of the purchasing power.

The economic development of this Eastern country went forward by higher speed than expected and skipped USA also in those areas, which most specialists expected in a few years. The current weakening of Chinese economy is also the risk for the countries that export stock, which could affect especially Australia, South Africa, Brazil, Chile and Russia that face up the impact of falling oil prices. The cost of fuel could decrease. This would lead to the investment decrease in the renewal of mining equipment and searching for the new resources, which could intensify the crisis of the oil industry. The previous motor of the global growth significantly weakens and in the whole world evoke fears of investors, who cannot imagine the next future without the fast expanding milliard country (OECD, 2015a , OECD, 2015b  and IMF, 2015a ).

Although the Chinese economy weakened, its cultural influence and hinterland is strong. In terms of competitiveness, the expectations for the Czech Republic are not good. Most of respondents from the Czech Republic suppose that Czech companies will be worse in the competitiveness in the next years, namely compared to competitors from Asia and also from South America. Based on researches outputs performed by Roland Berger Strategy Consultants, a great deal of company managers across Europe thinks pessimistically. Czech companies predict their future competitiveness optimistically only in comparison with the rest of Europe (European Chamber, 2015 ).

From the research results arose these data. Most companies think that the Czech Republic will lose in the next years a part of its competitiveness compared to Asia (73%) and South America (53%). The main steps in the improvement of the competitiveness are investments in infrastructure, the flexible labour market and the decrease of budget deficit (Roland Berger Strategy Consultants, 2015 ).

Although the restructuring is perceived as a continuous process, the Czech managers approach this restructuring with the lowest intensity from all involved countries. Czech companies perceive positively their liquidity position. The only one region, where the liquidity problems continue, is the south-west Europe (Roland Berger Strategy Consultants, 2015 ).

The fears that the economic growth is not possible to eternalize and that there are some limits, behind them is either decline or collapse, go along with economic theories since long ago, e.g. Malthus theory, Ricards model, etc.

Richer countries have the economic advantage in the fact that they become still richer, while the poorer countries have the disadvantage, because the faster product growth per capita is for them a problem. The existence of the gap at the level of average labour productivity and at the level of living standard is according to the connotation of the theory of an endogenic growth – if it is adequate – of more permanent character (Mach, 1995 ).

Discussion

The society development was quantified by Morris as “the social ability to control the mental and physical environment to achieve some aim in the time ”. According to the Morriss definition is the social development based on four attributes – the energy capture, the organization, the war-making, and the information technology. The last attribute is very important especially in recent decades, when the industrial development goes to the third industrial revolution. “The energy system makes the civilization character and affects the labour world ”, argues the American economist Jeremy Rifkin. The humanity has passed the first industrial revolution in the 19th century and the second in the 20th century. Now, begins the third industrial revolution, where modern technologies play an increasingly important role. The central analytical tool that Morris introduces is a “social development index”, an index of four features that can be measured for various social locations at various points in time. The four features are: energy capture, urban development, war fighting capability, information handling capacity ( Morris, 2011 , Morris, 2014  and Rifkin, 2011 ).

Morris (2011) monitored and compared the four attributes and transformed them into the numeric value, the outputs of his survey are demonstrated in the following graph (Graph 2 ).

Graph 2.

World population and social development index (Morris, 2011 ).

From this graph is evident the growth of the world population and the fundamental cultural and historical influences; and the social development, which was slow, nearly invisible. Nowadays, we are on the threshold of the second machine age, humans trying to use the brain to understand and form the world around (Brynjolfsson and McAfee, 2014 ).

Will we always obtain the models about the maximizing profit with minimum investment and the trade models, which try to sell more and more products? The vision of the new world model offers Jeremy Rifkin, the American economist and philosopher: “Many leaders think about the future, because the current economy experiences some volatility. In our time, everything revolves around the elite sources, such as oil, coal, gas and hydrogen. But there are courageous ideas that it is possible to obtain all of its energy from renewable sources , wind, solar and oceans , which could have an immense impact on the new world order .” ( Rifkin, 2011 ).

The economist and the Nobel Prize winner, Robert W. Fogel from University of Chicago calculated in 2012 that by 2040 the Chinese economy will be three times larger than the American economy providing that China will continue in the present trend, it means that Chinese people use a part of their wealth for buying of lots and companies in the USA. They go any further and they break into the American services and gradually into other countries.

Although the growth of the Chinese economy slightly slows down, it is faster than in other countries. This is also the possible reason for some Czech companies to leave the Chinese market. According to the foresight prognoses and the general economic situation of the country, there is a pressure for the wages growth; and this causes that some companies transfer their production parts back to Europe or India. The growth of costs cause many factors – more assertive employees with higher remuneration requirements, growing commodity prices, growing taxes, low inflow of new employees, higher credit costs. The other problem was an increase in consumption of some goods, e.g. scrap iron for the automotive industry, which led to prohibition of an export of scrap iron from the country and an increase in input prices in the production process and for that reason the final produce price in China got near the price in Europe. This was the other reason for some of the automotive and processor companies to leave the Chinese market. For an illustration, here are two examples of companies, which ten and more years ago transformed their production in the Chinese market. The company BRANO Group a.s. restricts production; and the company Koh-i-noor Hardtmuth for purely pragmatic reasons ends its production in China after years.

Conclusions

A presumption of high living standard, which all countries of the world and their inhabitants want to achieve, is according to the current paradigm of economic science, the economic growth. Its rate is thought as the rate of success of the economy. But the practical experiences from the recent decades show that the economic growth has, beside the for sure positive aspects, also many negative impacts.

The economy does not take pace in a vertical line, meaning management from the top down, but at the horizontal level within the meaning of sharing in the net among the individuals. The hierarchy and interlinks disappear. It begins to appear as the island economy, especially in the field of renewable resources, local energy, and local foodstuff. The cooperation does not take place in the horizontal line but in the vertical line. This essentially changes also the way of peoples working. The mass production and large factories disappear and more people will work in services, in IT, building industries and logistics. The construction of new infrastructure makes thousands of new entrepreneurial opportunities and millions of working stations (Rifkin, 2011  and Morris, 2014 ).

The connection of new energy sources and new communication tools changes totally the way of living. It can be achieved thanks to the ability of new technologies to process and save large data volumes, so-called “big-data”. The time, when the centralized management and peoples organizing dominated, should with the social development and modern technologies step back into the background for the benefit of “shared help”.

The old view on the evolution according to Herbert Spencer seems to be outdated since the start of information technologies. Rifkin evaluates this notable market change in the new cooperative space. The market changes in the ecosystem and similarly the model of peoples ordering of the world. Martin Luther King (1965) argued: “The arc of the moral universe is long but it bends towards justice”.

What importance will have the return of the Czech companies from China to the homeland in terms of bilateral foreign trade? The importance of China as the most significant importer into the Czech Republic has not changed so far. Some of Chinese companies expand into Europe and as the seat they chose the Czech Republic, e.g. CEFC, these foreign investments are for the Czech Republic beneficial not only in terms of the balance of payment.

Conflict of interest

The author declares that there is no conflict of interest.

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